- Discuss the primary reason for the restatement and the impact to the financial results for the company you selected.
Air Methods Corporation is the largest company dealing in the air transportation of medical supplies in the world. The company announced on 22 December 2011 that it had completed the restatement of its financial statements covering the year ended in December 2010 and for the first three quarters of year 2011. The corporation indicated that it had filed amended quarterly and annual reports for the applicable years with the exchange commission (SEC). The corporation specifically filed a 10-K/A form for the fiscal year that ended on 31 December 2010 in addition to a 10 Q/A form for the quarters that ended on 31 March, 30 June and 30 September 2011 (Air Methods Corporation, 2011).
The company, as previously disclosed, restated its financial statements after it received some guidance from the SEC concerning the appropriate GAAP interpretation of the ASC 840-10-25-14 that affected the presentation of the company’s aircraft leases. The implications of this financial restatement were within the ranges that the company had disclosed previously. As it follows, the company is now current with its filling requirements as stipulated by the SEC. The corporation expects to regain compliance with the appropriate and applicable NASDAQ listing regulations promptly with the filings restated (Air Methods Corporation, 2011).
- Discuss management responsibility to the investors and stakeholders for the financial restatement.
Restating financial statements usually leads to a wide range of market responses, but in most cases, the market tends to have negative reactions towards such news. However, on the positive light, restatements of finances usually pin point which items were reported inappropriately in the original statement. This correction makes it possible for investors and other stakeholders and users of the financial statement to study the marginal essentiality of such items on the operations of the company and market cap (Cross, Robinson, Salhus & Zepralka, 2004).
Generally, restatements reflect negatively on the management and give stakeholders and shareholders the impression or idea that the management is incompetent or knowingly trying to defraud them. Previous studies have indicated that restatements are directly related to a decrease in the value of the company, a decline in the future earnings and an inflated cost of capital. The first most common immediate response to financial restatements is a considerable drop in the stock price of the concerned company and market capitalization. It is, therefore, the responsibility of the management to assure investors and shareholders that there is no foul play in the restatement of the financial statements. It is also the responsibility of the management to restore investor confidence in the company’s stock, and ensure that the value of the company’s stock is restored and improved (Cross, Robinson, Salhus & Zepralka, 2004).
- Discuss what changes you would expect the company leadership to make related to internal controls, accounting principles, or other initiatives, as a result, of the need to restate the financial statements.
The self- regulatory structure prevails on the corporate governance concept. Directors and managers of a public company are responsible for making sure that the content and preparation of financial statements accurately and fully depict the financial condition of the company and the results of all its activities. However, the audit committee and the internal auditor of the public company play critical roles in oversight. The key role of the corporate board of directors is to direct and oversee the management of the corporation and uphold the interests of its investors and shareholders. The internal auditors offer another check on the control systems and operations of the company. Independent auditors usually provide additional protection in connection with all public corporations and numerous other entities (Hribar & Jenkins, 2004).
All public corporations are registered with SEC and are required to audit their financial statements using independent auditors. Although the management of a public company is responsible for the content and preparation of the financial statements of the company, the independent external auditor has a role of auditing the statements according to the GAAS. The purpose of an audit is to present reassurance that the financial statements of a company are shown fairly in all respects and in accordance to GAAP (Hribar & Jenkins, 2004).
Independent audits ensure public confidence that financial statement issuers are reliable and ensure an efficient market for securities of public companies. This sense of confidence and assurance only takes place if reasonable investors see auditors as expert and independent professionals who have no curiosity about the audited entities or other conflicting interests. Investors and other entities expect these professionals to bring about independence, integrity, professional competence and objectivity to the reporting process of the finance, and to prevent the issuance of financial statements that are misleading. There are number of ways the management can use to scrutinize the company’s financial statements to lead to restatements (Hribar & Jenkins, 2004).
One of these processes begins with leads to errors, which can be found through press reports, surveillance activities, or investor complains. Leads that are promising have a potential to become inquiry matters, which are then conducted to evaluate and determine whether an investigation is required. If the inquiry leads to evidence that merits an investigation, the enforcement staff is required to carry it out by reviewing trading data, records and books and other relevant information. The results from the investigation are what determines the next causes of action, whether a civil action or an administrative proceeding (Hribar & Jenkins, 2004).
- Discuss the impact to the trustworthiness of the company’s leadership team based on the need to restate the financial statements.
As already mentioned, restating of financial statements have numerous negative implications for the value of the stock of the concerned public company. Studies have shown that most of the restatement announcements lead to the loss of millions of dollars in the market capitalization segment, and the stock price, on average, of a company making an initial financial restatement fell by more than 18 percent from sixty trading days prior to through sixty trading days after the restatement. These studies have found that during a period of 6 months, the total loss of capitalization of markets of restating companies more than doubled to more than 240 billion dollars (Palmrose, Richardson & Scholz, 2004).
Not only so financial restatement announcements seem to have a negative impact on the stock prices of a company, but there also seems to be evidence suggesting that these announcements and the questions that arise about certain accounting practices of the company may have negative impacts on overall confidence of the investor. Investor confidence is not easy to quantify because it cannot be directly measured and because investors consider a wide variety of factors before making investment decisions. Nevertheless, numerous studies indicate that financial restatements will have a negative effect on the confidence of investors and the value of the company’s stock (Palmrose, Richardson & Scholz, 2004).
- Air Methods Corporation. (2011). Air Methods completes restatement of financial statements. Yahoo Finance. Retrieved from http://finance.yahoo.com/news/Air-Methods-Completes-pz-1347935173.html
- Cross, M.B., Robinson, E., Salhus, K. & Zepralka, J. (2004). Restatements of Financial Statements: Selected Legal and Accounting Issues. The Newsletter of the Committees on the Federal Regulation of Securities, 9 (1).
- Hribar, P. & Jenkins, N.T.(2004). The Effect of Accounting Restatements on Earnings Revisions and the Estimated Cost of Capital. Review of Accounting Studies 9, 337-356.
- Palmrose, Z., Richardson, V. J. & Scholz, S. (2004). Determinants of Market Reactions to Restatement Announcements. Journal of Accounting Economics 37, 59-89.